2023-10-12 18:16:39 ET
Summary
- Groupon's shares plunged after announcing the sale of shares in SumUp Holdings for $9 million, lower than expected.
- The company has been struggling with declining revenues and negative working capital, leading to significant cash burn.
- Analysts predict no material revenue growth until 2026, and I believe the company may need a major capital raise.
One of the biggest losers so far this week has been Groupon ( GRPN ). The daily deals and experiences site saw its shares plunge after the company announced a small asset sale plan . Since I first covered the name nearly a decade ago, the name has been one of the worst performers in the market, losing almost all of its value despite the overall market soaring. Today, I decided to take a look again because there are still major issues that could lead to even larger losses.
Groupon has entered into an agreement to sell shares representing approximately 9.4% of its approximate 2.3% interest in SumUp Holdings S.à r.l. for an aggregate cash purchase price of €8.4M. This equates to about $9 million, and the transaction is expected to be completed within the next two weeks. In the release, management also detailed that it will continue to evaluate other opportunities to sell non-core assets. This sales price probably was a bit of a disappointment, because it extrapolated out to around $95 million for Groupon's full stake. On the Q2 conference call , management said the value for this position was about $120 million.
In the past couple of years, Groupon has undergone some major restructuring efforts as it looks to stabilize the business. Analysts currently are looking for revenues to decline by more than 15% in 2023, whereas estimates started the year looking for the top line to grow in the mid-single digits, percentage wise. Unfortunately, the street doesn't see too much improvement coming in the next couple of years, with no material revenue growth expected until 2026. At the end of Q2, active customers were down about 19% year over year, leading to a double-digit decline in revenues.
In 2022, service revenues dropped to around $600 million from nearly $800 million a year earlier. However, the real problem was that the company's cost base was out of control, with around $630 million in operating expenses alone (not counting restructuring or the cost of revenues). Groupon has narrowed its losses a bit this year, partially due to additional one-time expenses in the year ago period, but it still lost over $41 million in the first half of 2023 when including restructuring costs).
While the income statement alone may be enough to chase investors away, my biggest problem currently is the company's balance sheet. At the end of Q2, Groupon reported cash of about $118 million, but that includes almost $47 million of funds borrowed through the company's revolving credit facility. The company's major losses in recent periods have led to some meaningful cash burn, which has totaled about $300 million in the past year and a half. Unfortunately, things remain in a very troublesome place, as the chart below shows that working capital remains highly negative.
At the end of Q2, working capital stood at about negative $172 million. That means that there are a lot of bills coming due in the next couple of quarters, without a concrete ability for them to be paid back. Groupon definitely needs a major capital raise in my view, but with a market cap of about $325 million right now, an equity offering will be highly dilutive. Perhaps the company can find a way to go the debt route, but between high interest rates and a lot of financial distress, interest expenses would likely be large and only hurt the company's ability to turn things around.
Currently, the average price target on the street for Groupon was $11 per share, implying a little bit of upside now that the stock has plunged. However, if you account for a potentially $25 million haircut to the SumUp stake, then analysts are basically looking for the stock to hold steady. I cannot agree with that rationale, which is why I would rate the name a sell today. Beyond the major revenue declines and losses, the financial situation here is tenuous at best, and a major capital raise could put significant pressure on the stock in the next few quarters. I would only consider a potential upgrade on that rating once we see the company get its financial house in order, and that also assumes that the revenue situation doesn't worsen into 2024.
In the end, Groupon's asset sale on Tuesday seemed a bit disappointing, sending shares sharply lower for the day. This puts into question how further monetization efforts of non-core assets will fare, as the company's balance sheet is in horrible shape. With revenues continuing to decline over prior year periods, losses and cash burn are ongoing. The stock may be down 95% since I first covered it nearly a decade ago , but there seems to be plenty more downside possible as I think the company needs a major capital raise to keep going.
For further details see:
Groupon Plunge May Just Be The Beginning